The joint agencies (OCC, Federal Reserve Board, FDIC, Farm Credit Administration and NCUA) recently approved a final rule that modifies the regulation for loans secured by property located in a special flood hazard area.  The final rule implements certain provisions that were established under the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) such as the requirement to escrow for flood insurance premiums on residential improved real estate securing a loan, as well as, an exemption for mandatory flood insurance for specific detached structures.  In addition to the requirements established by HFIAA, the final rule implements provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters) regarding the force placement of flood insurance.
Detached Structures – The final rule incorporates an exemption for any structure that is part of a residential property but is detached from the primary residential structure and doesn’t serve as a residence.  The final rule does clarify what is considered “detached” and what is considered a “structure that is part of a residential property”.
Escrow Provisions – The rule generally requires flood insurance premiums and fees to be escrowed on residential improved real estate or a mobile home securing a loan that is made, increased, renewed, or extended as of January 1, 2016.
The rule does not apply to:

  • Loans made for a business, commercial, or agricultural purpose;
  • Loans in a junior or subordinate position if the first lien is secured by the same residential property and flood insurance is already in place;
  • Home equity lines of credit.

The rule also:

  • Requires a lending institution to offer the option to escrow flood insurance premiums and fees on loans outstanding as of January 1, 2016.
  • Revises the Notice of Special Flood Hazards to include a notice regarding the escrow requirement and establishes a new model notice for the option to escrow requirement.

Force Placement – The rule implements certain provisions of Biggert-Waters related to force placement of flood insurance; clarifies that institutions have the authority to charge a borrower for the cost of force-placed flood insurance coverage beginning on the date on which the borrower’s coverage lapses or becomes insufficient.
The final rule is effective as of October 1, 2015 with the exception of the escrow requirement for flood insurance payments which is effective January 1, 2016.
Make no mistake, this won’t be the last you hear on the topic of flood!
A copy of the final rule is available here.